(Bloomberg) -- London’s stock market could shrink further in 2024 as takeover activity swells and new share listings languish, brokerage Peel Hunt said in a report, noting that the pace of M&A had accelerated toward the end of last year. 

Smaller companies are especially in focus, Peel Hunt’s head of research Charles Hall said, noting 40 British companies with a value of more than £100 million ($126 million) had received takeover offers in 2023 and could therefore leave the stock exchange. Meanwhile, initial public offerings have been “minimal” in the past two years.

“The pace of de-equitisation is relentless and will likely continue unless action is taken and impacts quickly.” Hall wrote. “This is driven by the low UK valuations, which makes it an attractive hunting ground for acquirors and is a key factor behind the dearth of IPO activity.”

New British share listings barely reached $1 billion last year — the lowest annual tally since the 2008 crisis. Meanwhile $25 billion worth of takeover deals involving London-listed companies were announced in 2023, data compiled by Bloomberg show. This includes pending as well as completed deals. 

Hall said foreign buyers had been especially active, accounting for 55% of last year’s deals. UK M&A transactions on average carried a 50% price premium, he noted, a reflection how depressed equity valuations have become. Among companies that received approaches last year were Hotel Chocolat Group Plc, Restaurant Plc Group and Numis Corp. Plc.

Taken together, the bids indicate that 8% of the FTSE Small-Cap index could exit in the course of a year, according to Hall. An acceleration of M&A activity toward the end of last year and peaking interest rates suggest “activity will be heightened during 2024,” he added

Britain’s stock market is widely seen as being in a vicious circle, whereby low valuations, poor performance of its equity indexes, and depressed liquidity weigh on appetite from fund managers, retail buyers and overseas investors. Since the 2016 Brexit vote, a total of $100 billion has fled UK stock funds, Barclays Plc estimated at the end of last year, citing EPFR Global.

A major blow came in 2023, when chip designer Arm Holdings Plc shunned London for its IPO in favor of New York. But even before that, London’s IPO scene was dogged by several high-profile listing flops, including Aston Martin Lagonda Global Holdings Plc and Deliveroo Plc. More bad news emerged last month, when travel group TUI AG said it could make Frankfurt its primary listing, instead of London.

Read more: The UK IPO Market Hasn’t Been This Slow Since the Great Crisis

Hall said, however, that the negative trend can be reversed quickly by engineering a pick-up in fund flows. This can be achieved by encouraging retail participation in the stock market, more regulatory incentives for pension funds to invest locally and by reducing Britain’s high stamp duty levels.

“If we do see increased demand for UK equities, then valuations should improve materially, which would make an IPO a more attractive option,” he added. 

--With assistance from Michael Msika, James Cone and Kit Rees.

©2024 Bloomberg L.P.